The Company Voluntary Arrangement (CVA) is becoming a familiar term, particularly in the increasingly beleaguered retail sector where the number of retailers opting for a CVA has doubled since 2016.
The principal focus of these CVAs has been on reaching an arrangement on property lease liabilities owed to landlords, while largely not seeking to compromise the position of other creditors, including defined benefit (DB) pension schemes.
A DB pension scheme is one that promises its members benefits linked to their final salary or some other measure, irrespective of the value of the assets in the scheme.
This creates a risk of a funding shortfall in the scheme that must be met by the employer responsible for the DB scheme.
Many companies proposing CVAs have such DB pension schemes and these may be affected by the CVA, directly or indirectly.
Rise in popularity
The CVA is a statutory tool that can be used by a debtor company to reach an arrangement on creditors’ claims or give effect to some other restructuring of the company’s affairs.
Its use has become symbolic of the decline in UK high streets as a result of the exponential growth in online shopping.
One of the reasons many businesses are turning to the CVA is that once approved by the requisite majority of creditors, a CVA binds all creditors irrespective of whether or how they voted, subject to some exceptions and a creditor’s right to challenge the CVA.
This avoids the need to negotiate and reach an agreement with each creditor individually.
The approval of a CVA proposal requires support from at least 75 per cent by value of voting creditors and more than 50 per cent by value of voting shareholders.
When a CVA proposal is filed at court for a company that is an employer of a DB pension scheme, this constitutes an “insolvency event” under pensions legislation.
This may result in a Pension Protection Fund (PPF) assessment period beginning.
The PPF is the pension’s “lifeboat” fund.
It was established to pay compensation to members of eligible DB pension schemes following the insolvency of the pension scheme’s employer, where the scheme’s assets are insufﬁcient to provide beneﬁts of at least the amount of compensation that the PPF provides.
It is funded by a levy on all DB schemes.
Challenges to CVAs
A CVA can be challenged on grounds of material irregularity or unfair prejudice.
Although the bar for successfully challenging a CVA is high and formal challenges to CVAs have been rare compared to the number of CVAs passed, in recent years there has been a spike in formal challenges.